Transitioning Towards Net Zero: A Closer Look

The number of companies with realistic hopes of achieving net zero targets is declining. A recent survey conducted by Fidelity International among its analysts reveals that 43% of companies have a credible net zero target for 2050 – down from 57% last year. On a more positive note, most of our analysts report that the companies they cover remain committed to the issue, as they become increasingly aware of the threats posed by climate change and ecosystem degradation.

Limited Progress on ‘Net Zero’ Goals
In recent years, companies have pledged to reduce their carbon emissions and offset any remaining emissions to ensure a net zero contribution to global warming. Most of these targets are set for 2050, in line with the Paris Agreement. However, our analysts estimate that only 42.9% of companies have a plan that is capable of meeting the requirements set by the Paris Agreement. Even more concerning, this figure has decreased compared to last year.

Analysts highlight strategies used by executives as the 2050 deadline approaches. For example, some companies set decarbonization goals but only achieve them by selling off assets, shifting the responsibility for emissions to the new owner.

Three Ways to Drive Progress
It is clear that there is still a long way to go to achieve the ‘net zero’ goal. According to our analysts, three areas will drive improvements in companies’ environmental practices: regulation, government support, and shareholder engagement. Following the emphasis on regulation in our survey last year, it is encouraging to see new laws emerging. The International Sustainability Standards Board has created a global reference point for sustainability reporting. Meanwhile, the European Union has implemented its Corporate Sustainability Reporting Directive (CSRD) to support its efforts to reduce emissions by 55% by 2030.

On the other hand, the number of analysts who view shareholder engagement as a key lever has increased. They believe that the most effective shareholder engagement is one that is conducted alongside company management teams. Collective efforts by investors often have the most impact. Fidelity has led Climate Action 100+, a group of institutional investors managing around $68 trillion in assets, in an ongoing engagement with Australian mining company Rio Tinto. As a result, the company has agreed to be accountable for its spending, progress on decarbonized steel projects, and to encourage management to continue these initiatives through long-term incentive schemes.

Addressing the Discrepancy Between Words and Actions
There is another reason why companies continue to engage constructively in their environmental practices: they know that the risk is real and affects their financial activities. The insurance sector is already seeking to mitigate this impact. A European financial analyst reports: “Non-life insurers are collaborating with third-party data providers to combine their own results with larger climate and weather data sets. This allows insurers to engage with their clients in preventive actions and price policies accordingly.”

While companies may be lagging in implementing ‘net zero’ plans, they are increasingly aware of the risks. The road ahead is still long, but our analysts find ways – and many reasons – for companies to succeed.

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